Yesterday also saw the latest growth and current account figures for Australia released and the parallels with the facts behind the headline numbers and our interview were notable.

You’ve probably read all the news on this already but in a nutshell, Australia’s GDP fell to its lowest annual rate since the depths of the GFC at 1.4% after a 0.5% print for the June quarter. That compares to the Government’s projection of 2.5% and RBA’s 1.8%... quite a miss.

But it is what’s behind the headline that is even more concerning. If you take out government spending and iron ore exports, we are in a recession right now. The government was talking up the first current account surplus in 44 years but that was solely courtesy of the rampant ore market. Other than that and government spending which contributed 0.5%, dwelling approvals fell 9.7% and investment in new and used dwellings fell 6% in the quarter (growth through the year down by 10.9%!), retail sales fell another 0.1%, car sales dropped another 10% equating to household final consumption of just 0.2%. Without population growth from a surge in migration that would be a lot worse.

The AMP’s Chief Economist, Dr. Shane Oliver summarised:

“The weakness in the Australian economy that started in mid-2018 has continued well into 2019. The make-up of growth still remains a concern as private demand fell again in the June quarter (by 0.1%) with large increases in public spending and net exports “saving” the economy.

With consumer spending still struggling to lift noticeably, falling residential construction, moderate business investment growth, the private sector side of the economy will likely remain weak.

A softer global environment may also infiltrate further into Australia’s external sector.

So the risk of an Australian recession remains and can’t be ignored. However, this is not our base case partly because we expect more RBA interest rate cuts, possibly quantitative easing, and more fiscal stimulus which should help lift growth.

If the improvement in home prices continues it would also be positive for household wealth and provide some boost to inflation.

While the RBA kept the cash rate unchanged yesterday (Tuesday), despite knowing the weakness in July retail sales and anticipating a low June quarter GDP number, we still expect rate cuts in October and November taking the cash rate to 0.5% as global data remains weak, the unemployment rate increases and global central banks (the ECB and Fed) cut interest rates (and restart asset purchases in Europe) in September which may influence the RBA’s decision to do more monetary stimulus lest the Australian dollar rises.”

The starkly contradictory political diatribe from both sides yesterday was as pathetic as it was predictable. And so, as we discussed in that interview, the temptation of creating more and more money to ‘fix’ things, look good, and get re-elected will continue. The government spending may indeed still be cash positive at the moment but that will end with the ore price correcting, and that ore price is arguably solely inflated by China debt funding more and more construction to do the same.

This all appears a win win for precious metals holders as the gold and silver spot price increase on this being a global phenomenon not just an Aussie one, and the prospect of more stimulus (rates and even QE) from our RBA likely means a lower AUD to add to those gains.

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